Overview of the US National Debt

The US national debt is a complex yet crucial component of the global financial system, often misunderstood by the general public. It is important to understand its true nature and role in the economy before considering any drastic measures such as paying it off with newly printed currency.

What is the US National Debt?

The term national debt is essentially a running count of all reserves or savings stored in the economy in dollars. This includes holdings in U.S. Treasury securities, which are government-issued debt instruments often perceived as risk-free and highly liquid, akin to cash.

The Role of US Treasury Securities

At its core, the U.S. national debt is composed of Treasury securities, which function as nearly risk-free, liquid savings instruments. While they do pay a small amount of interest (typically around the yearly inflation rate), these securities do not shrink due to inflation. They are a form of near-money, often substituting for traditional bank reserves.

Obfuscations and Misconceptions

Despite popular belief, the national debt is not a deficit that needs to be eradicated. For many individuals, the national debt appears as debt, particularly when the government spends. However, to the savers, including the Social Security trust funds, Federal Reserve itself, pension funds, and foreign governments, these securities are their savings in an account at the Federal Reserve, a group of banks.

Economic Implications of Paying Off the Debt

Technically, paying back the national debt, which involves zeroing out the reserves or savings, would mean shutting down these accounts entirely, leading to a complete shrinking of the economy. This is both impractical and undesirable, as savers would lose their savings, leading to a catastrophic impact on financial stability and economic activity.

Understanding the Nature of Money

It is crucial to understand that money itself is created through debt. Banks create the majority of the money supply when they issue loans. Savings are debt to someone and money to someone else. The concept of debt is inseparable from the creation of money. Reducing the money supply by paying off a significant portion of the national debt would have severe economic consequences, including a potential recession or depression.

A Case Study: The Economic Impact of Federal Spending

Consider a family’s financial situation after a layoff. The family applies for assistance, which comes from federal spending, specifically from the Social Security program. The family’s ability to afford food and necessities is directly tied to this federal spending. The money does not come directly from taxpayers; instead, it is spent and redistributed through various economic channels, benefiting the overall economy.

Interest on the National Debt

Another common misconception is the notion that taxpayers fund the interest on the national debt. In reality, if the deficit is larger than the total interest payment each year, the interest is effectively covered by the deficit, not by taxpayers. Dividing the total interest paid each year by the total national debt yield a percentage rate, which is typically close to or below the inflation rate. This means that the real value of the debt does not grow in inflation-adjusted terms, making the idea of taxpayers paying the interest redundant.

Conclusion

In conclusion, the national debt is an integral part of the economy, particularly when the dollar serves as a reserve currency. Paying it off with newly printed currency is not a viable or desirable solution. Instead, recognizing the debt as a form of savings and accepting its role in the economy as a mechanism for economic stability and growth is more appropriate. Understanding the functional interplay between money, debt, and economic growth is crucial for sound policymaking and public understanding.